Over $7.7 billion was stolen in crypto scams worldwide in 2021, or an 81% rise compared to 2020, the Chainalysis report said. Including rug pulls in the DeFi ecosystem accounted for over $2.8 billion stolen, or 37% of all cryptocurrency scam revenue, compared to 1% the year before.
According to a new report by blockchain analytics firm Chainalysis, scams were once again the largest form of cryptocurrency-based crime by transaction volume, with over $7.7 billion worth of cryptocurrency taken from victims worldwide.
That represents a rise of 81% compared to 2020, a year in which scamming activity dropped significantly compared to 2019, in large part due to the absence of any large-scale Ponzi schemes. However, that changed in 2021 with Finiko, a Ponzi scheme primarily targeting Russian speakers throughout Eastern Europe, netting more than $1.1 billion from victims.
Another change that contributed to 2021’s increase in scam revenue: the emergence of rug pulls, a relatively new scam type particularly common in the DeFi ecosystem, in which the developers of a cryptocurrency project – typically a new token – abandon it unexpectedly, taking users’ funds with them. We’ll look at both rug pulls and the Finiko Ponzi scheme in more detail later in the report.
As the largest form of cryptocurrency-based crime and one uniquely targeted toward new users, scamming poses one of the biggest threats to cryptocurrency’s continued adoption. But some crypto businesses are taking innovative steps to protect their users and nip scams in the bud before potential victims make deposits, the report said.
At the same time, the study shows the end of a long-standing statistical relationship between cryptocurrency asset prices and scamming activity. Scams typically come in waves corresponding with sustained price growth in popular cryptocurrencies like Bitcoin and Ethereum, which usually leads to influxes of new users. The data reveals scamming activity spiked following bull runs in 2017 and 2020.
Rug pulls are most commonly seen in the DeFi ecosystem. More specifically, most rug pulls entail developers creating new tokens and promoting them to investors, who trade for the new token in the hopes the token will rise in value, which also provides liquidity to the project – that’s how most DeFi projects start. In rug pulls, however, the developers eventually drain the funds from the liquidity pool, sending the token’s value to zero and disappearing. Rug pulls are prevalent in DeFi because, with the right technical know-how, it’s cheap and easy to create new tokens on the Ethereum blockchain or others and get them listed on decentralized exchanges (DEXes) without a code audit. That last point is crucial – decentralized tokens are meant to be designed so that investors holding governance tokens can vote on things like how assets in the liquidity pool are used, making it impossible for the developers to drain the pool’s funds. While code audits that would catch these vulnerabilities are common in the space, they’re not required to list on most DEXes, hence why we see so many rug pulls.
The report concludes that scams represent a huge barrier to successful cryptocurrency adoption, and fighting them can’t be left only to law enforcement and regulators. Crypto businesses, financial institutions, and blockchain analysts like Chainalysis might also play an important role.